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Wednesday, May 14, 2014

Why Income Inequality Has Increased in Canada

Incomeinequality in Canada has increased over time. Wealthy households are getting
wealthier and poor and middle class households are not getting better off. This
increase in inequality is due to the decrease in the share of the compensation of employees in the gross
domestic product (GDP) and to the increase in the share of gross operating surplus in GDP. The compensation of employees is
made up of wages and salaries, and social contributions at the expense of
employers. As for gross operating surplus, it consists of the profits before
taxes of corporations and government business enterprises, investment incomes,
and capital consumption allowances. The
share of the compensation of employees fell from nearly 54 % in 1981 to
half of the GDP three decades later whereas the share of gross operating
surplus rose from 24 % to 28.28 % over the same period. Only a
minority of households benefits from the increase in the share of gross
operating surplus: the wealthy entrepreneurs and investors.

To
measure income inequality, Economists use the Gini coefficient. The Gini coefficient is a summary statistics that
indicates how far income distribution across the population is from a hypothetical society
where everybody has the same income. It lies between zero and one, with zero indicating
equality of income across the population. I have plotted below the pre-tax Gini
coefficient in comparison with, on the one hand, the share of the compensation
of employees and, on the other hand, the share of the gross operating surplus
over the time period 1981-2011 in Canada.

Gini Coefficient along with the Share of the
Compensation of Employees in GDP (Left-Hand Side Panel) and the Share of Gross
Operating Surplus (Right-Hand Side),
1981-2011, Canada, Data Source: Statistics Canada

It
appears in the first panel of the above figure that income inequality increases
while the share of the compensation of employees decreases. Income inequality
increases by 1.04% when the share of the compensation of employees decreases by
one percent. The second panel shows the inverse relationship. Income inequality
increases along with the increase in the share of gross operating surplus.

It
seems to me that an increase in the tax on capital, the lightening of the tax
burden on employees, and employment policies designed to have more people prefer getting
back to work rather than living on benefits are solutions to reduce income inequality.